Assessing Credit Risk on Municipal Short-Term Debt

Abstract

Since 1979, yields on new issues of long-term municipal debt have risen sharply both absolutely and in relation to yields on long-term corporate and U.S. Treasury debt. In contrast, yields on short-term municipal debt have risen only moderately and offer a relative bargain. Consequently, there has been a shift in the traditional role of municipal short-term debt and a dramatic increase in its relative importance. There is reason to believe that the rapid growth of short-term debt since 1980 is not a mere passing phenomenon and that such debt is an increasing part of the permanent gov­ernmental debt structure.

This paper examines the relationship between accounting information and municipal short-term credit ratings. It appears that short-term ratings are distinct from bond ratings, and that it would be inappropriate to use bond ratings as a proxy for the credit evaluation of short-term notes. Also, the empirical results suggest that accounting information can be used to provide greater quality separation among issuers of short­ term notes.

Keywords: governmental credit risk, short-term debt

JEL Classification: G18, L11, l15, L51, L80, M40, M41, M42, M48